Point of View

Business incentives, OK, but smarter ones for North Carolina

December 29, 2012 

Incentives are under a bright national spotlight thanks to a recent New York Times series, which found state governments collectively spend over $80 billion per year on business attraction and retention. This money, which usually comes in the form of generous tax breaks, is offered at the expense of essential public services, including education.

Without the incentive offer, it is presumed that corporations would locate their facilities elsewhere, taking precious jobs and purchasing power with them.

The good news is that North Carolina is a leader in incentive effectiveness, and our state government commits relatively modest amounts to these incentives, spending close to $69 per capita, compared with the $751 spent by Texas. There are also encouraging signs that members of our state legislature will push to reduce the amount the state offers in incentives even further, perhaps even proposing their outright abolishment.

Change is needed. Elimination is certainly one option. If our goal is to improve immediate employment opportunities and expand business investment throughout this state, we should also consider using incentives in a smarter way.

Simply cutting state incentives programs such as JDIG, One NC or GoldenLeaf may actually undermine long-term employment objectives. This is because incentive use at the local level would likely replace state incentive granting. Our state incentive programs have relatively strict oversight and “clawback” measures that ensure that incentive payments are made only if promised job creation materializes.

Absent these state-level programs, the local-level incentives landscape would essentially become deregulated. As a result, local communities could become even more vulnerable during negotiations with prospective firms.

Beyond elimination, economic development incentives can be significantly reformed so that our counties and municipalities achieve real and lasting benefits from this public investment. Economic development scholars acknowledge incentives are rarely the central factor in business location decisions. Still, they can tip the balance for a company choosing between places that offer similar locational advantages.

As a result, incentives have the potential to be a powerful tool for influencing local job creation and business investment decisions – as long as they’re done right. When they are, practitioners can use them to push companies to meet wage and hiring goals, target growth sectors of the economy and fund activities that have greater staying power within a community, especially infrastructure or customized training assistance. .

Our state government must remain a strong standard setter. The state should maintain strict wage and job quality standards for all businesses getting incentives and avoid relaxing these performance criteria. The state should actively partner with local practitioners to help them achieve similar employment standards.

This is not simply a matter of top-down enforcement, but rather involves active mentoring and knowledge-sharing by the state so that local practitioners have the skills, confidence and guidance they need to better defend these standards themselves. This includes encouraging localities to experiment with initiatives that tie incentives to local hiring goals and related community benefits – good examples can be found in the City of Durham.

The state should also make a stronger commitment to sector-based recruitment and empower localities to do the same. This means confining the use of discretionary incentives to a strategic list of industry targets. This is not to say we should generate a single or static list for the entire state – but rather, in devising and updating multiple lists we need to be mindful of specific regional advantages and also limitations.

This will allow practitioners at the state level to put forward communities that offer the best fit for a given firm – but also begin to help communities strengthen and better market their existing assets. The build out of advanced manufacturing industries in North Carolina, including biopharmaceuticals, nonwovens and aerospace, reflects this strategic approach.

In fact, our research shows that incentives offered in sectors where North Carolina has already made significant strategic investments perform better than other economic development deals. Incentivized companies in these sectors – such as biopharmaceuticals – tend to stay longer than their peers and create more jobs on average. When incentives are used in concert with other publicly funded assets, like the N.C. Biotechnology Center and our public university system and its research centers, better outcomes emerge for workers and taxpayers.

In these difficult economic times, we need to maximize the effectiveness of every tool for stabilizing and expanding employment. Let’s make our state’s incentive programs stronger and smarter tools for guiding local economic recovery and development efforts.

T. William Lester and Nichola Lowe are professors in City and Regional Planning at UNC-Chapel Hill. Allan M. Freyer, a public policy analyst with the N.C. Budget and Tax Center, also contributed.

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